Extracting property from your company

Getting your ducks in a row

You’ve always planned to take ownership of your company’s valuable property when you retire. You can rent it out for a tidy profit to fund your retirement, but there’s no guarantee that a potential buyer would be interested in the building. Before you start the sales process, you need to extract the property from the company and put a new rental agreement in place. Here we consider the three main options.

Buying it back

It may seem straightforward to simply buy the property from your company as your friend suggests. The trouble is you’re deemed to be connected to your company, and as such the sale is treated as taking place at the property’s true market value, no matter the price you pay. The company faces corporation tax (CT) on the capital gain (market value minus original cost).

The indexation allowance can reduce a capital gain if it was purchased before December 2017. You’ll also have to personally pay stamp duty land tax (SDLT) on the full market value.

If you pay less than market value, the excess may be treated as a distribution subject to income tax. So you can buy it, but the tax cost could be prohibitive.

Distribution in specie

A distribution in specie is a fancy way of saying the company gives you the property as a dividend instead of cash. The company still pays CT on the capital gain based on market value. You’ll have to pay dividend tax rates on the market value of the property.

There’s no SDLT charge in this scenario providing you don’t pay consideration for the property.

If you take over a mortgage attached to the property, SDLT will be based on the value of the debt assumed.

There are a couple more boxes to tick if you go down this route. For example, the company must have enough distributable reserves and the articles need to allow in specie distributions.

Complicated break up

If the property is particularly valuable, you’re not going to want to pay dividend tax rates. There is a tax-free solution but it’s far from simple.

You can break up the property and the rest of your company by using a restructuring method called a capital reduction demerger, but, it is as complicated as it sounds. In a nutshell, you restructure by inserting a holding company via a share-for-share exchange and transfer the property to the holding company. You then reduce the shareholding of the holding company, and in consideration the original company can be distributed to a new company that you own. The intended result is that you own two companies, one that owns the property and one that owns the original company. The restructuring can take place tax free if done for commercial reasons but you need to apply to HMRC for advance clearance (see Further information ).

Given how complicated this method is we recommend engaging a professional to apply for the HMRC clearance. Make sure the tax savings will significantly outweigh the professional fees.